India, Inc. welcomes return of Esop-II

TIMES NEWS NETWORK  [ SATURDAY, MAY 21, 2005 12:16:35 AM ]


NEW DELHI: IT was an instrument that created the first flush of millionaire employees in India Inc , but subsequently fell out of favour, with companies putting it on the backburner.

Esops are now back with a bang. An increasing number of companies across sectors are rewarding their employees with stock options in a bid to perpetuate an ownership culture amongst them.

Within the past few months, Kotak Mahindra Bank, Nagarjuna Constructions, Samtel Colour, HCL Infosystems, Kale Consultants and Air Deccan have granted options to their employees.

It’s a marked departure from the past, when a company like Infosys, which pioneered Esops in India, stopped doling them out in May ‘03, when employees stopped exercising the options.

Interestingly, it’s not just a ‘tech trend’ anymore. Companies across sectors are adopting this method of wealth sharing for employees.

“For a company which is growing at a very fast clip like ours, and is also in a booming sector, the biggest impediment is not capital, technology, or machinery, but people. So we adopted Esops to attract, retain and motivate people,”
says YD Murthy, VP finance, Nagarjuna Constructions.

So, while airlines and construction companies are experimenting with the concept, Esops are steadily gaining momentum in industries like pharma, with companies like Lupin and Matrix Laboratories launching their own schemes.

One of the important reasons that has led to the resurgence of Esops is the booming stock market. “Two years ago, there were simply too many grants that happened at high prices, and when stock prices fell, the options became unattractive,” says Tarun Gulati, VP, EsopDirect, a Pune-based boutique specialising in Esops.

However, things have changed, and the stock market has bounced back. During the first quarter of this year, as many as seven tech companies, including Infosys, Wipro, HCL Infosystems and Kale Consultants have issued around 11 lakh shares as Esops.

If Esops are back, it’s because companies are realising their value as an employee retention tool. This becomes critical now, when top performers are being poached left, right and centre. Over the years, the instrument has gained more acceptance in the industry. “The instrument has entered a maturity phase, and companies have realised its long-term implications,” says Gulati.

This is also reflected in the fact that companies have begun to innovate and experiment a bit while structuring Esop schemes. For instance, some are going in for a performance and time-based vesting structure, a move away from the traditional time-based vesting schemes.

With the Institute of Chartered Accountants of India releasing a guidance note on the accounting of options, companies are clearer on Esops’ accounting aspect. Earlier, the accounting of options had led to much confusion, especially when it came to how the options were valued by companies.

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